Crowd Funding : A revolutionary new way to back your business start up

So you have an amazing new business, but no access to the capital you’ll need to successfully launch it? If this is the case, you have several options to secure funding. You could go the traditional route and apply for a government grant, but it’s typically a tiresome bureaucratic exercise with loads of forms to complete and, of course, no certainty that you’ll get the capital you need. And while the government may offer tax incentives to encourage research and development, if that’s your chosen field, it often requires that you first invest your own money before you can even think of applying to recoup the funds. Another option is to seek out a private investor – aka a “business angel” – should you have suitable contacts and understand how to structure a favourable deal that you won’t leave feeling disappointed or cheated down the line.

Have you heard of ‘Flow Hive’? Flow Hive revolutionized the way to harvest honey from the bee hive. The two Australian’s used crowd funding but to their surprise they raised just over $10 million. The founders were originally trying for $70,000, which it reached in 477 seconds. More than 6,100 people paid $600 for the full hive.

Starting up

Financing a start-up using their own funds – or “bootstrapping” – is probably the most common way for entrepreneurs to get their businesses going. Choosing to go this route means you’ll be funding your start-up out of your own savings, possibly even from tapping into your credit card. This makes bootstrapping a risky way to raise capital, but for many entrepreneurs the upside is they don’t have to hand over any control or equity to other investors.

However, bootstrapping can cause your business to flounder and fail due to under-capitalisation. And sadly too any start-ups never make it for just this reason. While it is widely agreed that small businesses are vital to a healthy economy, what hope is there for entrepreneurs if they’re not eligible for a government grant, can’t attract the interest of private investors and don’t have access to sufficient capital?

The answer is crowdfunding. Crowdfundingis a whole new approach to acquiring the funds needed to get your business out of the starting blocks.

Reaching out to multiple investors

By definition, crowdfunding is the practice of capitalising a campaign or business venture by securing small amounts of money from a large base of people. It is usually facilitated via an independent, online platform. And when compared with the other ways in which you could raise capital from multiple incremental investors – for example, through providing a prospectus or similar type disclosure documents that are often subject to strict controls and may even require you complete an involved and costly Initial Public Offering (IPO) process – crowdfunding is a relatively simple and cost-effective option.

When you choose the crowdfunding route to raising capital, you are essentially selling the public on the idea behind your proposed business venture or campaign, and asking them to pledge their financial support. In return, those who support you will receive a reward commensurate with the amount pledged. Rewards range from preliminary access to your product or service; a first edition of your book, album or movie; or (depending on the platform utilised) even shares in your proposed business. The important thing is to offer a reward that motivates the public to support your venture or project.

Which crowdfunding model should you choose?

There are two main aspects you need to highlight when setting up your crowdfunding campaign:

the amount of capital you aim to raise

and the time period you want to raise it in.

What happens when your chosen time period expires depends on your preferred funding model so to take the time to familiarise yourself with each platform’s terms and conditions prior to launching your campaign.

For example, the ‘all-or-nothing’ approach – implemented by such sites such as Pozible and Kickstarter – means that should you not reach your target amount in the stated time period, you won’t receive any money and those who’ve pledged to support you won’t get their rewards. However, if your campaign is successful, you will receive the funds raised – minus the commission charged by the site – and your pledgers will be rewarded accordingly. (Pozible is Australian owned, with headquarters in Melbourne)

How much should you reveal?

The trick to a triumphant crowdfunding campaign is in inspiring others to believe in your project or business. The public will tend to respond more generously if they understand why your project or business venture is important to you and what you’re hoping to achieve in the long-term. And this requires sharing your “origin” story with the public using multiple media sources like blogs, videos, photos.

The aim is to successfully convey your business idea without revealing too much of your intellectual property. It’s a fine line, but if you can get it right you might just find crowdfunding to be a lucrative source for the start-up capital you need to get your great business idea off the ground. It certainly is a funding option worth considering for all the budding entrepreneurs and big thinkers out there.

If you have any further questions regarding crowdfunding or would like to know about other potential funding strategies for your start-up, please contact SMART Business Solutions on 03 5911 7000 or reception@smartbusinesssolutions.com.au.

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